Sunday, June 01, 2008

Why are Oil Prices So High?

Why are oil prices so high? This is the question being asked with increasing frequency in many countries around the world. Some would have you believe that the blame should be placed on "greedy oil companies", "Arabs", "speculators" or "OPEC".

While speculation is happening with investors and hedge funds looking to commodities for returns that are not being seen in the stock or property markets, there are underlying fundamental reasons which mean prices are likely to stay high.

Last November the International Energy Agency released its annual World Energy Outlook report. Traditionally the agency has projected energy supply based on projected demand.

The agency has projected that India and China will lead the increase in energy demand making 45% of total growth. Oil imports for these two countries combined will grow to 19.1m barrels a day by 2030 compared to 5.4m barrels a day in 2006.

Demand for oil will grow to 116m barrels a day by 2030, an increase of 37% on 2006 oil usage. In this report back in November the International Energy Agency warned the price of a barrel of oil could rise to $159 by 2030 due to high growth in demand. This estimate now looks very conservative.

The reality is there have been some fundamental changes.

Before if the United States went into recession, this would lower demand for oil and prices fell. Now with China, India and other rapidly developing nations demanding ever increasing quantities of oil a recession in America is unlikely to lead to falling oil prices like it did in the past. Were per capita oil use in China and India to reach the same level as in the United States, this would fully deplete the world's remaining proven oil reserves in just 15 years and prospective resources, in 26 years.

The other fundamental change is that there is little excess production capacity. While Saudi Arabia would like the world to think it could increase production if it deemed it "beneficial" to the stability of the market, this is just an illusion of control. The reality of the OPEC cartel is that while sticking to production quotas may have benefited the group as a whole, individual countries have always "cheated" consistently and repeatedly exceeded their production quotas. In the past this has lead to significant downward pressure on prices.

This time the signs are that the world is at or near its maximum oil production capacity. Does this mean Peak Oil has arrived? In my opinion - not yet.

New production will continue to come online in the coming years which is likely to raise worldwide maximum oil production. So we haven't reached peak production... yet.

What we may be experiencing is what Robert Rapier calls Peak Oil Lite, with the early effects of Peak Oil arriving. Demand is rising faster than supply. In its July 2007 report the International Energy Agency predicts OPEC spare capacity will decline to minimal levels by 2012. The lack of spare capacity means, that price volatility increases with price spikes occurring in the event of supply disruption.

So what we are likely to experience prior to Peak Oil is Peak Export. According to Eugene Linden in BusinessWeek when it comes to oil our biggest concern should be the amount of "global oil available for export".

According to the Export Land Model developed by Jeffrey Brown - exports decline faster than production declines, the rate at which exports decline accelerates over time and only a small percentage of a producing country's production is exported following peak production.

According to a report in last week's Wall Street Journal, fresh information from the US Department of Energy shows the quantity of petroleum products shipped by the top exporting countries in 2007 fell 2.5% last, while prices increased 57%.

Net exports from major producers Mexico, Norway and Venezuela have fallen in every year since 2005.

With the rise in prices individual producing countries in OPEC had every incentive to "cheat" and yet exports fell. The influx of wealth into the Middle East has led to a boom in domestic demand. It seems that Middle Easterners aspire to the same gas guzzlers and energy rich lifestyles as Americans. Soaring profits from high-price crude have fuelled a boom in oil demand in Saudi Arabia and across the Middle East, leaving less oil for export. In 2007 the output of the region's six largest oil exporters - Saudi Arabia, United Arab Emirates, Iran, Kuwait, Iraq and Qatar - fell by 544,000 barrels a day. During the same period domestic demand increased by 318,000 barrels a day, leading to a decrease in net exports of 862,000 barrels a day.

A recent report from CIBC World Markets also indicates that as much as 40% of Saudi Arabia's expected production increases will be offset by rising internal demand by 2010, and Iranian exports will decline by more than 50% for similar reasons.

Indonesia recently withdrew from OPEC as it has gone from being a net exporter of oil, to a net importer of oil.

The Wall Street Journal report comments that the fall in oil exports "defies traditional market logic." Perhaps that should be blind faith that OPEC nations can turn on the taps if prices rise "too high". It seems even oil traders are unsure what is driving prices as according to one market analyst quoted by BBC News "we really don't know what the fundamentals are doing at any point in time." Much of the information on fundamental factors in the oil market is not public or freely available.

In simple terms demand is outstripping supply and prices are rising. This is how the market is supposed to work.

Other fossil fuel prices tend to follow oil. IEA's latest World Energy Outlook forecasts coal is set to rocket in demand, increasing by 73% from 2005 to 2030. This means coal's share in global energy demand will rise from 3% to 28%. It is predicted by 2015 America will go from being a net coal exporter to a net coal importer. Coal is the most carbon intensive way of generating electricity and this report predicts that rather than becoming a smaller part of the energy mix, coal is predicted to play a much bigger role.

With a presidential election this year in the United States and gas prices at record levels, oil and energy in general is set to be a key issue. There is the opportunity to have a serious debate about energy - a fundamental part of our lives which has been taken for granted for far too long. However the responses from the presidential candidates so far have not been encouraging.

In 2002 McCain declared that ethanol is a "giveaway to special interests in corn-growing states as the expense of the rest of the country." In 2003 he put out a press release saying "Ethanol does nothing to reduce fuel consumption, nothing to increase our energy independence, nothing to improve air quality." He went on to describe it as "highway robbery." Hillary Clinton signed a letter saying that there is "no sound public policy reason for mandating the use of ethanol".

McCain, Clinton and Obama all seem to have drunk the ethanol Kool Aid and seen the bright white light that has converted them to E85. In 2008 none of these presidential candidates seems to have anything negative to say about ethanol.

In 2006 Barack Obama along with four Republican and one Democrat senator introduced the Coal-To-Liquid Fuel Promotion Act.

There have also been accusations made against "Big Oil", "OPEC" (including by British Prime Minister Gordon Brown) and suggestions that a "gas tax holiday" or "windfall tax" would fix everything. It's always easier to find a scapegoat.

One bandaid being suggested from some quarters, is to open up drilling in the United States in areas which are currently off limit. This would give access to 19 billion barrels of oil enough to meet US needs for approximately two-and-a-half-years or world demand for just over 7 months at current rates of consumption.

To quote the head of the International Energy Agency:"All countries must take vigorous, immediate and collective action to curb runaway energy demand.

The next ten years will be crucial for all countries... We need to act now to bring about a radical shift in investment in favor of cleaner, more efficient and more secure energy technologies."

Monday, August 06, 2007

House Passes 15% Renewable Energy by 2020

The United States House of Representatives has passed an Energy Bill requiring utility companies to produce 15 per cent of their electricity from renewable sources such as wind and solar power by 2020.

The Bill passed in the House on a 241-172 vote, despite strong opposition from electric utility companies and the White House, which has threatened to veto the measure. Twenty six Republicans voted in favor and nine Democrats opposed the bill.

The renewable electricity standard applies only to investor-owned utilities and exempts rural electric cooperatives, municipal utilities, the Tennessee Valley Authority and the state of Hawaii from the mandate.

The bill also calls for stronger energy efficiency standards for appliances and lighting and incentives for building more energy-efficient buildings. The bill bans the sale of 100-watt incandescent light bulbs by 2012 and requires that all bulbs be 300% more efficient than today’s ordinary bulbs by 2020. The bill also includes a range of loan guarantees, federal grants and tax breaks for alternative energy programs. These include building biomass factories, research into making ethanol from wood chips and switch grass and producing better batteries for hybrid cars.

The bill will repeal a tax break for oil companies from 2004, and another tax break relating to income from foreign oil production. Critics of the two tax breaks called them loopholes that the industry had taken advantage of.

The 786-page House energy bill does not include an increase in fuel-efficiency standards for cars and light trucks. That issue, as well as whether to force major increases in the use of E85 fuel as a substitute for gasoline, were left to be negotiated when the House bill is merged with energy legislation the Senate passed in June.

"There's a war going on against energy from fossil fuels" said Representative Ralph Hall, Republican-Texas. Representative Joe Barton predicted the bill "isn't going to go anywhere" because President Bush would veto it if it reaches his desk.

In a somewhat surprising comment from the White House, they accused the bill of making "no serious attempts to increase our energy security". This defies commonsense as by producing more electricity from domestic renewable sources rather than with imported natural gas by definition increases the United States' diversity and security of energy supply.

As with all legislation the details (such as a subsidy for installing gas pumps for expensive and inefficient E85 fuel) need to be checked carefully. Regardless a 15% renewable energy standard is good news.

Monday, May 07, 2007

Brief Analysis of Climate Change Report

Here’s my brief analysis of and comments on the recent IPCC working group report on Mitigation of Climate Change released from Bangkok, Thailand as it relates to alternative energy.

Energy Efficient & Net Zero Energy Buildings

Energy efficiency and renewable energy are rightly held to be a key ways to reduce carbon emissions. Buildings, both residential and commercial, are a significant emitter of greenhouse gasses.

Solar hot water heating can be used to provide up to 70% of annual hot water needs for homes, it can also be used in commercial buildings that require significant hot water such as gyms and nursing homes.

Geothermal (ground source heat pumps) is a lesser known source of alternative energy which can be used to both heat and cool buildings in a highly efficient way and is suited both to residential and commercial buildings. It can also be used to provide hot water. As bore holes and/or trenches need to be dug for geothermal to be installed, it is particularly suited to new builds.

Electricity can be provided from renewable sources via the grid (e.g. wind power) or off-grid it can be generated using for example solar photovoltaic panels (PV).

As noted in the report appropriate building codes can minimise carbon emissions from buildings.

Alternative Energy = Energy Security

The report notes that nations seeking energy security (security of supply) can help achieve it using alternative energy. Nations lacking their own fossil fuels resources should be concerned with the negative impact reliance on fossil fuels can have on their economies. By increasing utilisation of alternative energy resources, nations can increase their energy security.

Transport Policy & Fossil Fuels Subsidies

I was disappointed by the report’s lack of vision on transport. It correctly notes that past increases in efficiency in internal combustion engine (ICE) design have been used to increase power rather than fuel efficiency meaning vehicle carbon emissions have continued to climb. This trend has even continued into hybrid vehicles with performance being favoured over fuel economy (e.g. Lexus hybrid cars). Mention was made of making increased use of biofuels, which can actually significantly increase carbon emissions (see this post on Palm Oil Biodiesel). The glaring emission, is the need for a fundamental shift from the internal combustion engine to electric vehicles. I got the impression the report in trying to build consensus was avoiding treading on any toes. Perhaps that’s why it recommended only reducing rather than eliminating the subsidisation of fossil fuels.

Research and Development + Technology Transfer

India and China will soon be at the top of the list of carbon emitting nations. The report wrongly suggests that because many new power stations are being built in developing nations, they will be using new energy efficient designs and technologies. While new power stations may be more efficient than those built decades ago, for cost reasons less efficient technology is usually used (for more details see this post on Clean Coal). The report notes there have been low levels of investment in research and development. Investment is needed now and much more should be done to aid the transfer of the most energy efficient technologies between nations.

Monday, February 05, 2007

Seeing Red: Palm Oil Biodiesel

In the enthusiasm for renewable energy and taking care of our environment, it is easy to assume that making fuel from plants (biofuel) must be by definition "green" and renewable. However when it comes to energy issues, easy assumptions can be dangerous assumptions. In previous years some politicians and advocates in Europe have made these assumptions without sufficient thought and research and secured government subsidies for companies importing palm oil from South East Asia to make biodiesel for transport and for use in electricity generation.

The demand for palm oil in Europe has soared in the last two decades, first for use in food and cosmetics, and more recently for fuel. This cheap oil can be used for a variety of purposes, including as an ingredient about 10 percent of supermarket products, from chocolate to toothpaste.

Promoted by hundreds of millions of dollars in national subsidies, the Netherlands quickly became the leading importer of palm oil in Europe, taking in 1.7 million tons in 2006, nearly double the previous year.

Now it is increasingly difficult to ignore the mounting body of scientific evidence that palm oil plantations in Indonesia and Malaysia, rather than preserving the environment are in fact actively destroying it. By subsidising biofuels, European governments have artificially raised demand for palm oil in Europe, and accelerated the destruction of huge areas of rainforest in South East Asia. Palm oil plantations are often expanded by draining and burning peatland, releasing enormous amounts of carbon dioxide into the atmosphere. As a result Indonesia has become the world's third largest emitter of carbon dioxide, ranked after the United States and China, according to a study released in December by researchers from Wetlands International and Delft Hydraulics, both based in the Netherlands.

The 2003 European Union Biofuels Directive, which required all member states aim to have 5.75 percent of transportation run on biofuel in 2010, is now under review. In the Netherlands, the data from Indonesia has prompted the government to suspend palm oil subsidies.

In Europe a small amount of rapeseed and sunflower oil is used to make diesel fuel, however increasingly plant oils are being imported from the tropics, since there is simply not enough plant matter or land for biofuel production at home. So while the billions of dollars in European subsidies appear to have reduced carbon emissions in European countries by importing biofuels, this has been achieved by exporting them and increasing their impact many times by the permanent destruction of rainforest and peatland in South East Asia.

For anyone familiar with how the ethanol industry works in the United States, they will be unsurprised to learn that the palm oil industry was promoted long before there was adequate research. Biofuel Watch, an environment group in Britain, now says that "biofuels should not automatically be classed as renewable energy." It supports a stop on subsidies until more research can determine if various biofuels in different regions are produced in a nonpolluting manner. The group also suggests that all emissions arising from the production of a biofuel be counted as emissions in the country where the fuel is actually used, providing a clearer accounting of environmental costs.

Friends of the Earth estimates that 87 percent of the deforestation in Malaysia from 1985 to 2000 was caused by new palm oil plantations. In Indonesia, the amount of land devoted to palm oil has increased 118 percent in the last eight years.

AFTER: a palm oil plantation

Peat is an organic sponge composed of 90 percent water that stores huge amounts of carbon, which when it is drained emits huges amounts of carbon into the atmosphere.

Even worse peatland is often burned to clear ground for plantations. The Dutch study estimated that the draining of peatland in Indonesia releases 660 million tons of carbon a year into the atmosphere and that fires contributed 1.5 billion tons annually.

Kuala Lumpur, Malaysiathe haze has covered much of SE Asia for extended periods of time since 1997

The total is equivalent to 8 percent of all global emissions caused annually by burning fossil fuels, the researchers said. "These emissions generated by peat drainage in Indonesia were not counted before," according to a Wetlands spokesperson. "It was a totally ignored problem."

While for the moment the widescale destruction of rainforests in South East Asia continues, hopefully the palm oil story will serve as a cautionary tale which will lead to much better informed policymaking and behaviour. Politicians must resist the urge to rush to legislate and subsidise in order to bask in the glow of being seen to be "doing something" while a number of so-called green companies profit from taxpayer subsidised destruction. Energy policy must make sense from a scientific (i.e. it should be energy positive), economic and environmental viewpoint. However the continued promotion of ethanol and coal-to-liquids calls for continued skepticism.

Friday, November 24, 2006

City Utilities End Coal Fired Electricity Contracts in California

In what is hopefully the start of a new trend, several Southern California cities have decided not to renew long-term contracts for coal-fired electricity, choosing instead to turn to cleaner sources of electricity.

City officials told Utah-based Intermountain Power Agency they wouldn't be renewing their contracts for coal-fired power, which expire in 2027, and would instead be looking for alternative energy sources.

"It's a huge change," said Mayor Todd Campbell of Burbank, one of the cities that decided not to renew its contract.

The cities are Pasadena, Glendale, Riverside and Anaheim. They join the Los Angeles Department of Water and Power, which has already choosen not to renew the contract with Intermountain. Currently coal fired electricity makes up a significant percentage of their power, for example Pasadena Water & Power says that the Intermountain plant is 65 percent of our energy.

Intermountain's general manager Reed Searle said the company had worked for three years on the renewals and was now looking at ways to modernize its plants to bring them into compliance with California's greenhouse gas legislation that takes effect on the first of January.

The cities' decision came after increased pressure from politicians and environmentalists.

Senator Dianne Feinstein wrote a letter to an umbrella group for the cities last week saying she was "shocked and dismayed" by an initial decision last month by Burbank to renew the contract.

Phyllis Currie, general manager of Pasadena Water & Power said the utilities wanted to explain how important Intermountain was to California cities. "It's a serious issue when you tell us to walk away from that," she said.

The move could put Southern California in the forefront nationally of the commercial use of alternative energy in coming years.

Intermountain has extended its renewal offer for power from the plants until 2023 from the previous deadline of May 2007 in the hope state regulators will let utility officials renew the contracts if greenhouse gases are reduced. Electricity utilities are starting to feel the pressure for "clean" coal.

Wednesday, November 22, 2006

$402m Tidal Energy Plant For New Zealand

New Zealand’s Northern Advocate reports that a US $402 million (NZ $600m) proposal to generate electricity with 200 tidal-powered turbines submerged at the entrance to the Kaipara Harbour could get under way next year. The harbour is one of the largest in the world. It’s a broad shallow harbour covering an area of over three hundred square miles and has more than two thousand miles of shoreline. It has a two and a half mile wide entrance to the Tasman Sea halfway along its length.

Although officially called a harbour, the Kaipara is rarely used for shipping, owing to the treacherous tides and bars at its mouth. For this reason, no large settlements lie close to its shores, although small communities dot its coastline.

Crest Energy has applied to the Northland Regional Council for resource consent to set the 22m-tall turbines on the seafloor along about 8km of the 30m deep main channel at the harbour entrance.

The tidal energy is expected to get the turbines generating 200 megawatts of power - enough for 250,000 homes. The turbines, shielded from fish, would sit on heavy concrete pylons and be at least 5m from the surface at low tide. Leisure craft and barges could pass over them, but would be restricted from anchoring in the turbine area.

Two 30km-long cables 125mm in diameter would feed electricity into the national grid.

Crest Energy claims the size and commercial scale of the Kaipara project would make it the largest of its kind in the world.

If the project gets the green light, possibly around the middle of next year, the company plans to raise about $50 million to begin building turbines.